Workday Takes Off Like a Rocket, and CEOs Like Its Model

Appetite was strong for shares of Workday, the cloud-based human capital management software company, as it debuted for trading on the New York Stock Exchange today.

The stock priced yesterday at $28 a share, valuing the company at north of $5 billion, and shares opened at $47.05. In late trading, they were around $49, a 75 percent increase.

The debut of the shares culminated a process that began in earnest almost a year ago to the day, when Workday announced that it had raised an $85 million institutional round. It wasn’t long before it was looking for bankers, and eventually settled on Morgan Stanley, Goldman Sachs, Allen & Company and J.P. Morgan Chase & Co., who ran the offering.

I got a few minutes with co-CEOs Aneel Bhusri and CFO Mark Peek at the NYSE today, all of them wearing broad smiles. While the company is still technically in a quiet period and thus can’t speak to specific future plans, we did talk generally about what’s next for Workday.

AllThingsD: Let’s talk a little about momentum. I couldn’t help but notice that, at the recent Hewlett-Packard analysts meeting, Meg Whitman mentioned that it has adopted Workday along with Salesforce.com. That sounds like a pretty big customer win for you. Is that an indicator of things to come?

Aneel Bhusri: I think it means that the cloud is mainstream. It’s gone from being a question to being a certainty in customer relationship management (CRM) with Salesforce, and human resources with Workday. And we’re hoping to make that case in finance, as well. And HP is a testament to the fact that the largest companies are now adopting the cloud. It’s now our biggest customer. I think they have more than 300,000 employees. Our biggest before was Flextronics, at about 200,000. There just aren’t many companies that are as big or as global as HP.

How is the financial product? Last we talked about it, it was still an up-and-coming product.

Bhusri: Very well. We still have some work to do to bring it to parity with the legacy systems. Our HR business took off once it hit feature parity with the legacy systems, and I think the same thing will happen with the financial systems. Right now, we’re selling it to more medium companies. There’s a few public companies that are using it now.

And when we talk finance, we’re talking things like a company’s general ledger and things like that?

Bhusri: Yes. It’s a full suite. General ledger, accounts receivable, accounts payable, assets, purchasing. People don’t buy it in individual pieces anymore, but as a suite.

Let’s talk about Oracle CEO Larry Ellison. He’s been beating up on Workday every chance he gets. Obviously, there’s some history there, since Oracle acquired your previous company, PeopleSoft. What do you think of what he’s been saying? Oracle is also doing a big pivot toward running all its applications in the cloud, and in a mixed on-premise and off-premise manner. What do you think of all this?

Bhusri: First of all, I think it’s great that Oracle is embracing the cloud. I think it makes it easier for the customer. And so is SAP. It’s all good for the customer. We personally don’t believe in the hybrid model. At the end of the day, without a true multi-tenant, one version model, you can’t really solve the pain of the upgrade cycle. With a customer that is hosted, or on-premise, the upgrade path is no different than it was before. We take over all the software upgrades, and that’s where all the cost savings come from. And Salesforce sees it the same way, and so do Amazon and Google.

Obviously, the mixed on-premise and off-premise approach doesn’t work for you. You can’t deliver Workday in a hybrid manner?

Bhusri: We could. We just choose not to, because we don’t think its the right model. It would be very easy to give a customer a copy of our software and let them run it on their own hardware, but the whole beauty of the on-demand model is that the upgrade process is now the domain of the vendor. That is why people are on versions of other software that are three and four versions behind, because they couldn’t get the upgrades done.

What sort of competitive threat do you see coming from Oracle’s Fusion apps? Every Oracle application runs in the cloud now.

Bhusri: Oracle is definitely a formidable competitor. You can see how fast we are growing. I’m not sure that Fusion was ever meant to be a cloud application. Its name comes from “fusing” Oracle and PeopleSoft and JD Edwards. It was never intended to be a cloud app, but Oracle has the resources to get that done. We see it competitively, but so far it isn’t really slowing us down. The good thing is that the market is going to expand, because no one is waving the flag for on-premise software anymore. I mean, Oracle and SAP have both basically said they’re all in on the cloud. We happen to be the youngest company of the three, but we have the most mature product. We’ve been doing this in the new way for seven years, and they are just getting going.

So, with the caveat that I’m not asking for guidance, where do you want things to be by this time next year?

Mark Peek, CFO: Today, about half of our R&D spend is on the financials product. So we’re really working on expanding the market. We believe there are about 23,000 companies in the world that have 1,000 or more employees. Today, we have 340 of those in HCM (human capital management), and 30-plus in finance. And so our R&D focus is on financial. We want to hit the updates and grow the business in HR, and get additional flagship companies in the financials product, as well. We’re also going to focus a lot on international expansion. About 90 percent of our revenue is from North America, so we’ll want to expand internationally and work with partners who can work on the deployments for us.

Bhusri: We will have done three more updates, and I would like to say a year from now we’ll be showing off a few flagship customers in finance, like we did with HR in Flextronics and Chiquita. We have very good customers in finance right now, but they’re not Fortune 500 customers just yet. Once we have a few, it will be the tipping point for financials going into the cloud, as well.

After HR and finance, is there a third leg to the stool that you want to add down the road?

Bhusri: Down the road, if there’s one area we’re intrigued with, it’s analytics. Anything that ties in to the HR world and the finance world. We’re doing a great job on transactions, and we have our embedded business intelligence. But then there’s this whole data warehouse space that needs to be disrupted, as well. That’s an area on the radar. But for the time being, what we’re doing on in the HR and financial space is going to keep us really busy.

Back to international expansion for a minute. How are you seeing Europe, given all the trouble there?

Bhusri: Our European business, though its growing off a small base, is the fastest-growing piece of our business. I think Europe is going through a tough patch right, now, but in some ways we help them cut costs. It’s not the reason for being, but it’s a benefit that’s helping. In the cloud, we’re about half the cost over a five-year period as the legacy systems. And European customers want the same cost-benefit as the North American ones.

Peek: When the economy is tough is when people tighten their IT budgets, but they are also looking for ways to save money. Back during the recession, we were growing 50 percent. Even though people were taking discretionary money and moving quickly. If they can save money, they will.

Here’s a video of Workday’s bell-ringing ceremony at the NYSE this morning:

I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

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